Friday 22 June 2018

The cost of your knowledge inventory, and how it can be reduced.

What is the price, or cost, of your knowledge inventory? In fact, you already pay the cost without knowing it.

Creative commons image from pxhere

Let's look at the cost of acquiring and maintaining the inventory of tacit and explicit knowledge.

Tacit knowledge

As people become more experienced (through gaining tacit knowledge) they command a higher salary. They aren't getting any smarter, but they are getting more knowledgeable, and so more valuable. As Larry Prusak said "When I was at my last job, at the age of 50 they paid me 10 times more than a 30-year old with the same qualifications. What was the residual difference? Knowledge and experience".

The value of that person's knowledge is therefore their current salary, minus the salary of an equally smart (but totally inexperienced) new starter, and the value increases by . So take the total salary bill for your organisation, estimate the cost of replacing them with graduates, and the difference is the value of Knowledge (Larry Prusak shortcuts this, and estimates the value of knowledge as about 60% of your non-capital spend).

Imagine an organisation of 10,000 people with an average salary of £50,000. You can replace these people with new graduates and school leavers working for (lets say) £15,000. So this organisation is currently spending £350,000 per year on knowledge. 

You can reduce this management cost by ensuring the knowledge does not stay in the heads of the experts, and distributing it more widely and making it available to the nextperts (people just below the role of expert) and to the general practitioners. If nextperts can do the work that experts used to do, then the salary cost can come down, or you can do work more efficiently with the same salary.

Tacit knowledge is acquired through experience, which is basically people doing their job (see below about the cost of learning from mistakes), or acquired through hiring people. The hiring cost can be reduced by keeping the knowledge in-house when the individual retires, so that maybe you don't need to hire a replacement, or if you do, you can minimise the development cost of that individual by providing them with knowledge when they need it.

Explicit knowledge 

The acquisition cost of explicit knowledge is measured in the mistakes and rework of the past upon which the practices of today are based. Sometimes that cost is very high. According to Captian Sully Sullenberg, the hero of the emergency landing on the Hudson river (interviewed here);

"Almost every rule in the Federal Aviation rulebook, almost every bit of knowledge we have is because someone, somewhere died. Often many people did. And so we have learned these important lessons at great cost, literally bought with blood. We dare not forget and have to relearn them".
Please note that this historical acquisition cost is a sunk cost - you would have paid this cost whether you learned from the mistakes or not. It does however give you some ideal of the scale of the potential inventory value.

This acquisition cost can be reduced in future by ensuring lessons are embedded into guidance and that people follow the guidance, thus avoiding repeat mistakes (which are the cost of reacquiring knowledge), and also by learning from the repetition of good practice and not just from mistakes.

There is also an acquisition cost associated with conducting lessons capture events, and with documenting knowledge into guidance, but these are generally trivial when compared to the cost of the mistake or rework.

Once acquired, the management cost of explicit knowledge is relatively small. Maintaining the knowledge will be the job of a practice owner or a community of practice, and that cost needs to be factored in. Then there will be the licence fee for whatever software you use to house the explicit knowledge.

However there will be a transaction cost incurred with the re-use of the knowledge. This includes:

  • The time people spend browsing and searching for the knowledge;
  • The time wasted looking for knowledge which they do not find;
  • The licence for the search engine;
  • The efficiency by which people can integrate the new knowledge they find into their existing working habits.
These costs can be lowered, apart from the search engine licence, by packaging and structuring knowledge well and wisely, and by maximising its findability (see this post on the Knowledge Supermarket). 

So it seems much of the costs associated with knowledge acquisition are sunk costs associated with staff wages and with mistakes and rework. Your organisation has paid this price already; all you need to is release the value tied up in this cost. Then many of the other costs can be reduced as well.

You might as well use that knowledge, given how much you have paid for it!

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